China: 5% or 4.5-5.0% Growth Target
Though economics would argue for a 4.5-5.0% growth target for 2024, politics will likely mean that a 5% growth target is chosen in March. With the residential property overhang, weak net exports with a shift of global supply chains and sluggish private sector business investment growth, this will likely require further fiscal and monetary stimulus. Next step should be a 10bps cut in the medium-term facility (MTF) rate on March 15.
Figure 1: China MTF Rate (%)
Source: Continuum Economics
One of the key question for the new lunar New Year is what growth target will policymakers set for 2024 and what policy changes will they make to achieve the goal. 2024 will be harder than 2023, as 2023 benefitted from the shift from zero COVID policies that helped boost suppressed sectors of the economy e.g. tourism and consumer services. Early data from lunar New Year travel suggests that train and airplane travel will not only clearly exceed 2023, but also 2019. Whether this translates into a similar boost to retail sales is uncertain, which puts a focus on the March 18 release of the February retail sales data. Retail sales is split between good and weak sectors, with property related consumer spending remaining depressed. Weak employment growth, plus general consumer uncertainty post COVID, is also a restraining influence outside of tourism and consumer services.
With net export growth weak, this means the main driver of growth are business investment and government spending. However, private business investment spending is slow, with the shift to state socialism and ongoing regulatory and corruption crackdowns. This would argue for a 4.5-5.0% growth target being set for 2024 in March. The most likely outcome is that 5.0% growth will be the target, which reflects political desires to show that China is strong. What extra policy measures could be expected? Speculation is strong that March 15 will likely see a reduction in the MTF rate.
We look for 10bps, despite the large than expected RRR cut of 50bps announced January 24. PBOC appears to feel that RRR cuts are more effective at boosting the supply of credit. We do see two further 25bps cuts in the RRR rate and two 10bps cuts in the MTF rate later in the year. However, this is unlikely to have a dramatic effect on lending growth, as most private sector borrowers are focused on paying down debt or not increasing it significantly. Thus further fiscal stimulus will likely be required. This could be a Yuan 1trn of government spending funded by special sovereign bonds, but this would produce an incremental boost to growth rather than a sea change. Based on the above policies our growth forecast for 2024 remains at 4.2%. The other alternative is that real GDP reporting could be biased higher to meet a 5.0% growth target.